Module 3: The Business Plan 2012

Module 3: The Business Plan

1. Nature and scope Business plan
A business plan is a written document prepared by the entrepreneur that describes all the relevant external and internal elements involved in starting a new venture. It addresses both short- and long-term decision making. The business plan is like a road map for the business development. The Internet also provides outlines for business planning. Entrepreneurs can also hire or offer equity to another person to provide expertise in preparing the business plan. In developing the business plan the entrepreneur can determine how much money will be needed from new and existing sources. A business plan is a formal statement of a set of business goals, the reasons why they are believed attainable, and the plan for reaching those goals. It may also contain background information about the organization or team attempting to reach those goals. Business plans may also target changes in perception and branding by the customer, client, taxpayer, or larger community. When the existing business is to assume a major change or when planning a new venture, a 3 to 5 year business plan is required, since investors will look for their annual return in that timeframe Business plans may be internally or externally focused. Externally focused plans target goals that are important to external stakeholders, particularly financial stakeholders. They typically have detailed information about the organization or team attempting to reach the goals. Business plans are decision-making tools. There is no fixed content for a business plan. Rather the content and format of the business plan is determined by the goals and audience. A business plan represents all aspects of business planning process declaring vision and strategy alongside sub-plans to cover marketing, finance, operations, human resources as well as a legal plan, when required. A business plan is a summary of those disciplinary plans. The business plan should be prepared by the entrepreneur; however, he or she may consult many sources. Lawyers, accountants, marketing consultants, and engineers are useful supplemental sources. Other resources are the Small Business Administration, Service Core of Retired Executives, Small Business Development Centers, universities, friends, and relatives. To help determine whether to hire a consultant, the entrepreneur needs to make an objective assessment of his or her own skills.

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Module 3: The Business Plan 2012 The business plan must be comprehensive enough to address the concerns of employees, investors, bankers, venture capitalists, suppliers, and customers. Three perspectives need to be considered: The entrepreneur understands the new venture better than anyone. The marketing perspective considers the venture through the eyes of the customer. The investor looks for sound financial projections. The depth of the business plan depends on the size and scope of the proposed venture. The business plan is valuable to the entrepreneur and investors because: a. It helps determine the viability of the venture in a designated market. b. It gives guidance in organizing planning activities. c. It serves as an important tool in obtaining financing. Potential investors are very particular about what should be included in the plan. The process of developing a business plan also provides a self-assessment of the entrepreneur. This self-evaluation requires the entrepreneur to think through obstacles that might prevent the ventures success. It also allows the entrepreneur to plan ways to avoid such obstacles. 2. INFORMATION NEEDS Before preparing a business plan, the entrepreneur should do a quick feasibility study to see if there are possible barriers to success. The entrepreneur should clearly define the ventures goals, which provide a framework for the business plan. The business plan must reflect reasonable goals. 2.1 Market Information It is important to know the market potential for the product or service. The first step is to define the market. A well-defined target market makes it easier to project market size and market goals. To assess the total market potential, the entrepreneur can use trade associations, government reports, and published studies.

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Module 3: The Business Plan 2012 2.2 Operations Information Needs The entrepreneur may need information on: Location Manufacturing operations Raw materials Equipment Labor skills Space Overhead

Each item may require some research but is needed by those who will assess the business plan. 2.3 Financial Information Needs Before preparing the plan, the entrepreneur must evaluate the profitability of the venture through the following: Expected sales and expense figures for the first three years Cash flow figures for the first three years Current balance sheets and pro forma balance sheets for the next three years

Determination of expected sales and expenses is based on the market information gathered earlier. Estimates of cash flow will consider the ability of the new venture to meet expenses at designated times. Current balance sheet figures show the assets, liabilities, and investments made by the owner. 3. WRITING THE BUSINESS PLAN The business plan should be comprehensive enough to give a potential investor a complete understanding of the venture. 3.1 Introductory Page The title page provides a brief summary of the business plans contents, and should include: The name and address of the company The name of the entrepreneur and a telephone number A paragraph describing the company and the nature of the business The amount of financing needed A statement of the confidentiality of the report
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Module 3: The Business Plan 2012 It also sets out the basic concept that the entrepreneur is attempting to develop. 3.2 Executive Summary This is prepared after the total plan is written. It should be three to four pages in length and should Highlight the key points in the business plan. The summary should highlight in a concise manner the key points in the business plan. Issues that should be addressed include: Brief description of the business concept Any data that support the opportunity for the venture. Statement of you this opportunity will be pursued. Highlight some key financial results that can be achieved

Because of the limited scope of the summary, the entrepreneur should ascertain what is important to the audience to whom the plan is directed. 3.3 Environmental and Industry Analysis The entrepreneur should first conduct an environmental analysis to identify trends and changes occurring on a national and international level that may impact the new venture. Examples of environmental factors are: Economy Culture Technology Legal concerns All of the above external factors are generally uncontrollable

Next the entrepreneur should conduct an industry analysis that focuses on specific industry trends some examples of industry factors include: Industry demand Competition

The last part of this section should focus on the specific market. This would include such information as who the customer is and what the business environment is like. The market should be segmented and the target market identified.

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Module 3: The Business Plan 2012 3.4 Description of the Venture The description of the venture should be detailed in this section. This should begin with the mission statement or company mission, which describes the nature of the business and what the entrepreneur hopes to accomplish. The new venture should be described in detail, including the product, location, personnel, background of entrepreneur, and history of the venture. The emphasis placed on location is a function of the type of business. Maps that locate customers, competitors, and alternative locations can be helpful. If the building or site decision involves legal issues, the entrepreneur should hire a lawyer 3.5 Production Plan or Operations Plan If a new venture is a manufacturing operation, a production plan is necessary. This plan should describe the complete manufacturing process, including whether or not the process is to be subcontracted. If the manufacturing is carried out by the entrepreneur, the plan should describe the physical plant layout and machinery and equipment needed. If the venture is not manufacturing, this section would be titled operational plan. The entrepreneur would need to describe the chronological steps in completing a business transaction. 3.6 Marketing Plan The marketing plan describes how the products will be distributed, priced, and promoted. Potential investors regard the marketing plan as critical to the ventures success. 3.7 Organizational Plan The organizational plan section should describe the ventures form of ownership. If the venture is a corporation, this should include the number of shares authorized, share options, and names and addresses of the directors and officers. It is helpful to provide an organization chart indicating the line of authority. This chart shows the investor who controls the organization and how members interact. 3.8 Assessment of Risk It is important that the entrepreneur make an assessment of risk in the following manner: The entrepreneur should indicate the potential risks to the new venture. Next should be a discussion of what might happen if these risks become reality. Finally the entrepreneur should discuss the strategy to prevent, minimize, or respond to these risks. The entrepreneur should also provide alternative strategies should these risk factors occur.

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Module 3: The Business Plan 2012 3.9 Financial Plan The financial plan determines the investment needed for the new venture and indicates whether the business plan is economically feasible. The entrepreneur should summarize the forecasted sales and expenses for the first three years. Cash flow figure for three years are needed, with the first years projections provided monthly. The projected balance sheet shows the financial condition of the business at a specific time. 3.10 Appendix The appendix contains any backup material not included in the text of the document. 4. USING AND IMPLEMENTING THE BUSINESS PLAN The business plan is designed to guide the entrepreneur through the first year of operations. It should contain control points to ascertain progress. Planning should be a part of any business operation. Without good planning the employees will not understand the companys goals and how they are expected to perform their jobs. Bankers say that most businesses fail because of the entrepreneurs inability to plan effectively. The entrepreneur can enhance efficient implementation of the plan by developing a schedule to measure programs and to institute contingency plans. 4.1 Measuring Plan Progress Plan projections will typically be made on a 12-month schedule, but the entrepreneur should check key areas more frequently. Inventory control, by controlling inventory, the firm can ensure maximum service to the customer. Production control, Compare the cost figures against day-to-day operating costs. Quality control depends on the type of production system used. Sales control Information on units, dollars, and specific products sold should be collected. Disbursements the new venture should control the amount of money paid out

4.2 Updating the Plan Environmental factors and internal factors can change the direction of the plan. It is important to be sensitive to changes in the company, industry, and market.

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Module 3: The Business Plan 2012 5. THE MARKETING PLAN 5.1 PURPOSE AND TIMING OF THE MARKETING PLAN The marketing plan establishes how the entrepreneur will effectively compete and operate in the marketplace. Marketing planning should be an annual activity focusing on decisions related to the marketing mix variables. The marketing plan section should focus on strategies for the first three years of the venture. For the first year, goals and strategies should be projected monthly. For years two and three, market results should be projected based on longer-term goals. Preparing an annual marketing plan becomes the basis for planning other aspects of the business. 5.2 UNDERSTANDING THE MARKETING PLAN The marketing plan should answer three basic questions: Where have we been? -The history of the marketplace, marketing strengths and weaknesses, and market opportunities. Where do we want to go (short term)? - Marketing objectives and goals in the next twelve months. How do we get there? -Specific marketing strategy that will be implemented. The marketing plan should be a guide for implementing marketing decision-making and not a superficial document. The mere organization of the thinking process involved in preparing a marketing plan can be helpful in understanding and recognizing critical issues. 5.3 CHARACTERISTICS OF A MARKETING PLAN An effective marketing plan should: a. b. c. d. e. f. g. h. Provide a strategy to accomplish the company mission. Be based on facts and valid assumptions. Provide for the use of existing resources. Describe an organization to implement the plan. Provide for continuity. Be simple and short. Be flexible. Specify performance criteria that can be monitored and controlled.

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Module 3: The Business Plan 2012 5.4 STEPS IN PREPARING THE MARKETING PLAN Step 1: Defining the Business Situation The situation analysis is a review of where the company has been and considers many of the environmental factors. The entrepreneur should provide a review of past performance of the product and the company. Industry analysis should include information on market size, growth rate, suppliers, new entries, and economic conditions. Step 2: Defining Target Market/Opportunities and Threats The entrepreneur should have a good idea of who the customer or target market will be. The defined target market will usually represent one or more segments of the entire market. Market segmentation is the process of dividing the market into smaller homogeneous groups. The process of segmenting is: Decide what general market or industry you wish to pursue. Divide the market into smaller groups based on characteristics of the customer. Select segment or segments to target. Develop marketing plan integrating the parts of the marketing mix.

Step 3: Considering Strengths and Weaknesses It is important for the entrepreneur to consider its strengths and weaknesses. Step 4: Establishing Goals and Objectives Before strategy decisions can be outlined, the entrepreneur must establish realistic marketing goals and objectives. These answer the question "Where do we want to go? These goals should specify such things as market share, profit, sales, market penetration, pricing policy, and advertising support. Not all goals and objectives must be quantified. It is a good idea to limit the number of goals to between six and eight. Step 5: Defining Marketing Strategy and Action Programs Strategy and action decisions respond to the question "How do we get there?" It incorporates: 1. Product or Service This includes a description of the product and may include more than the physical characteristics. It involves packaging, brand name, price, warranty, image, service, features, and style.
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Module 3: The Business Plan 2012 2. Customer Service Meeting customer needs and creating loyalty involves a number of low-cost steps: In writing develop a statement of customer service principles. Train those employees who have direct contact with customers. Establish a process for evaluating customer service. Reward employees who are most effective in providing quality customer service. Make regular contact with customers. Invest in quality telephone equipment. Meet customer expectations.

Customer service is especially important for e-businesses. 3. Pricing. One of the difficult decisions is determining the appropriate price for the product. Factors such as costs, discounts, freight, and markups must be considered. Marketing research can help determine a reasonable price that consumers are willing to pay. 4. Distribution. This factor provides utility or makes the product convenient to purchase when it is needed. This variable must be consistent with other marketing mix variables. Type of channel, number of intermediaries and location of members should be described. Regardless of the type of business, it is usually necessary for the new venture to have a website. The Internet will become an increasingly important medium for information and distribution. Direct mail or telemarketing may be considered. Direct mail marketing is one of the simplest and lowest in entry costs. But the direct marketing or Internet strategies are not a guarantee for success. The entrepreneur should evaluate all possible options for distribution. 5. Promotion. The entrepreneur needs to inform customers as to the products availability using advertising media such as print, radio, or television. Usually television is too expensive unless cable television is a viable option. Larger markets can be reached using direct mail, trade magazines, or newspapers. A website may also create awareness and promote the product and services of the venture. It is possible to make use of publicity as a means of introduction. It is important that the marketing strategy and action programs be specific and detailed enough to guide the entrepreneur through the first year.

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Module 3: The Business Plan 2012 Step 6: Coordination of the Planning Process The management team must coordinate the planning process. The entrepreneur may be the only person involved but may lack experience in preparing the plan. Assistance is available from many sources. Step 7: Designing Responsibility for Implementation The plan must be implemented effectively to meet all of the desired goals and objectives. Someone must take the responsibility for implementing each decision made in the marketing plan. Step 8: Budgeting the Marketing Strategy Planning decisions must also consider the costs involved in the implementation of these decisions. This budgeting will be useful in preparing the financial plan. Step 9: Implementation of the Marketing Plan The marketing plan is meant to be a commitment to a specific strategy. A commitment to make adjustments as needed by market conditions is also valuable. Step 10: Monitoring Progress of Marketing Actions Monitoring of the plan involves tracking specific results of the marketing effort. What is monitored is dependent on the specific goals and objectives outlined. 6. THE FINANCIAL PLAN

A. The financial plan provides a complete picture of: How much and when the funds are coming into the organization. Where the funds are going. How much cash is available? The projected financial position of the firm. B. The financial plan provides the short-term basis for budgeting and helps prevent a common problem-lack of cash. C. The financial plan must explain how the entrepreneur will meet all financial obligations and maintain its liquidity. D. In general, the financial plan will need three years of projected financial data for outside investors.

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Module 3: The Business Plan 2012

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6.1 OPERATING AND CAPITAL BUDGETS Before developing the pro forma income statement, the entrepreneur should prepare operating and capital budgets. If the entrepreneur is a sole proprietor, he or she will be responsible for the budgeting decisions. In a partnership, or where employees exist, the initial budgeting process may begin with one of these individuals. Final determination of budgets will ultimately rest with the owners or entrepreneurs. In the preparation of the pro forma income statement, the entrepreneur must first develop a sales budget, an estimate of the expected volume of sales by month. From sales forecasts, the entrepreneur will determine the cost of these sales. Estimated ending inventory will also be included. Production or Manufacturing Budget. This budget provides a basis for projecting cash flows for the cost of goods produced. The important information in this budget is the actual production required each month and the needed inventory to allow for changes in demand. This budget reflects seasonal demand or marketing programs, which can increase demand and inventory. The operating budget is an important document, as the pro forma income statement will only reflect the actual costs of goods. Operating Budget. Next the entrepreneur can focus on operating costs. Fixed expenses (incurred regardless of sales volume) include rent, utilities, salaries, interest, depreciation, and insurance. The entrepreneur will need to calculate variable expenses, which may change from month to month depending on sales volume, such as advertising and selling expenses.

E. Capital budgets are intended to provide a basis for evaluating expenditures that will impact the business for more than one year. A capital budget may project expenditures for new equipment, vehicles, or new facilities. These decisions can include the computation of the cost of capital and the anticipated return on investment using present value methods. The entrepreneur should enlist the assistance of an accountant.
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Module 3: The Business Plan 2012 6.2 PRO FORMA INCOME STATEMENTS A. Sales is the major source of revenue; since other activities relate to sales, it is usually the first item defined. B. In preparing the pro forma income statement, sales by month must be calculated first. 1. Market research, industry sales, and trial experience might provide the basis for these figures. 2. Forecasting techniques, such as a survey of buyers intentions or expert opinions, can be used to project sales. 3. The costs for achieving increases in sales can be higher in early months. C. Sales revenues for an Internet start-up are often more difficult to project. A giftware Internet start-up could project the number of average hits expected per day or month based on industry data. From the number of "hits" it is possible to project the number of consumers who will buy products and the average dollar amount per transaction. D. The pro forma income statements also provide projections of all operating expenses for each month of the first year. Selling expenses as a percentage of sales may also be higher initially. Salaries and wages should reflect the number of personnel employed, as well as their roles in the organization. Any unusually expenses, such as those for a key trade show, should be flagged and explained at the bottom. E. In addition to the first years statement, projections should be made for years 2 and 3. Investors generally prefer to see three years of income projections. Some expenses will remain stable over time, like depreciation, utilities, rent, insurance, and interest. When calculating the projected operating expense, it is important to be conservative for initial planning purposes. F. For the Internet start-up, capital budgeting and operating expenses will involve equipment purchasing or leasing, inventory, and advertising expenses. G. Many of the recent Internet start-ups have not earned a profit.

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Module 3: The Business Plan 2012 6.3 PRO FORMA CASH FLOW A. Cash flow is not the same as profit. Profit is the result of subtracting expenses from sales. Cash flow results from the difference between actual cash receipts and cash payments. Cash flows only when actual payments are made or received. B. For an Internet start-up, the same transaction would involve the use of a credit card in which a percentage of the sale would be paid as a fee to the credit card company. C. On many occasions, profitable firms fail because of lack of cash; therefore, using profit as a means of success may be deceiving. D. There are two standard methods used to project cash flow. In the indirect method some adjustments are made to the net income based on the fact that actual cash may not have actual been receive or disbursed. The direct method, a simple determination of cash in less cash out, gives a fast indication of the cash position of the new venture at a point in time. E. It is important for the entrepreneur to make monthly projections of cash, pro forma cash flow. If disbursements are greater than receipts in any time period, funds will have to be borrowed or cash reserve tapped. Large positive cash flows may need to be invested in short term sources. Usually the first few months of start-up will require external cash in order to cover cash outlays. F. The most difficult problem with projecting cash flows is determining the exact monthly receipts and disbursements. Some assumptions will need to be made and should be conservative so enough funds can be maintained to cover the negative cash months. These cash flows will also assist in determining how much money will need to be borrowed. G. The pro forma cash flow is based on best estimates and may need to be revised to ensure accuracy. H. It is useful to provide several scenarios, each based on different levels of success.

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Module 3: The Business Plan 2012 6.4 PRO FORMA BALANCE SHEET A. The entrepreneur should also prepare a projected balance sheet depicting the condition of the business at the end of the first year. The pro forma balance sheet summarizes the assets, liabilities, and net worth of the entrepreneurs. Every business transaction affects the balance sheet. The balance sheet is a picture of the business at one moment in time and does not cover a period of time. B. Assets. Assets represent everything of value that is owned by the business. The assets are categorized as current or fixed. o Value is not necessary replacement cost-it is the actual cost expended for the asset. o Current assets include cash and anything that will be converted into cash within a year. o Fixed assets are those that will be used over a long period of time. o Management of receivables, or money owed by customers, is important to the business cash flow of the business. C. Liabilities. Liabilities accounts represent everything owed to creditors. Current liabilities are due within a year. Others are long-term debts. It is often necessary to delay payments of bills in order to more effectively manage cash flow. D. Owners Equity. This amount represents the excess of all assets over all liabilities. Owners equity represents the net worth of the business. Any profit from the business will also be included in the net worth as retained earnings.

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Module 3: The Business Plan 2012 6.5 BREAK-EVEN ANALYSIS A. It is helpful for the entrepreneur to know when a profit may be achieved. Break-even analysis is a technique for determining how many units must be sold in order to break even. The firm has fixed cost obligations that must be covered by sales volume in order for a company to break even. The break-even point is that volume of sales at which the business will neither make a profit nor incur a loss. The break even sales point is the volume of sales needed to cover total variableand fixed expenses. B. The break-even formula is: B/E (Q) = TFC SP-VC/unit (marginal contribution) As long as the selling price is greater than the variable costs per unit, some contribution can be made to cover fixed costs. The major weakness in calculating the break-even is determining whether a cost is fixed or variable. Costs such as depreciation, salaries and wages, rent, and insurance are usually fixed. Materials, selling expenses, and direct labor are most likely variable costs. C. When the firm produces more than one product, break-even may be calculated for each product. D. The entrepreneur can try different states of nature, such as different selling prices to see the impact on break-even and profits.

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